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From Site Selection magazine, September 2011

On the Rebound?
Or Never Came Down?

FDI levels are rising in India. So are actual projects,
thanks to government approvals and infrastructure needs.

An artist’s rendering of a proposed Infocity being planned by leading Indian developer Shapoorji & Pallonji.
A proposed IT park being developed by Shapoorji & Pallonji.
A proposed IT park being developed by Shapoorji & Pallonji.

riving along the Old Mahabalipuram Road (OMR) in Chennai, the capital of the southern Indian state of Tamil Nadu, you come across scores of construction sites with hundreds of workers busily laboring on, even as the sun sets across the Bay of Bengal, just a mile to the east.

Traffic zips across on the wide artery — dubbed the IT corridor — as thousands of employees working at several multinational companies in the information and IT enabled services sector head home, even as others report for the night shift at BPOs and other facilities.

Chennai, once a quiet, laid-back and conservative city, has emerged as a vibrant automobile and information technology hub, attracting hundreds of Indian and international companies lured by lower real estate costs, better lifestyle and saner traffic conditions. And the 30-mile (48-km.) IT corridor — the first phase, covering about 12 miles (19 km.), is now nearing completion. OMR is today bustling with activity as corporations have once again started investing in real estate.

Indeed, at a time when the threat of a double-dip recession is hovering ominously over several economies across the globe, India continues to confound observers with its unusually buoyant economic indicators.

Take foreign direct investment (FDI) inflows, for instance. In June, the inflows shot up by a phenomenal 300 percent, touching US$5.65 billion, the second-highest monthly inflow in more than a decade. This was on the back of a 111-percent jump in inflows in May, when FDI added up to $4.66 billion.

In the first quarter of the current fiscal year (India’s financial year starts in April), FDI inflows at $13.44 billion shot up by 133 percent in comparison with the first quarter of the previous fiscal year. In fact, 2011 has been a remarkable year for India in terms of global investment inflows. During the first six months of the year (January-June), FDI inflows were up by a hefty 53.8 percent at $16.68 billion.

Analysts expect fiscal 2011-12 could prove to be a record year for foreign capital inflows, perhaps even topping $35 billion. Unlike foreign institutional investments, or portfolio inflows that are invested in the stock markets, FDI represents long-term capital that goes into the acquisition of productive assets, contributing to economic expansion and generating jobs.

Worryingly for the government, FDI inflows stalled in the wake of the global recession and declined sharply over the past three years. In 2008-09, India attracted $27.3 billion in FDI; it fell to $25.6 billion a year later and plunged to $19.43 billion for fiscal 2010-11.

According to the World Investment Report from the United Nations Conference on Trade and Development (UNCTAD), India slipped six notches to the 14th spot in the global rankings of economies attracting FDI. (The UNCTAD report, along with many other international studies, considers the calendar year for FDI inflows, and not India’s financial year; this results in variations in FDI inflow figures).

Megaprojects Finally Moving

Recent months have seen the Indian government tackle formidable issues that have stalled FDI inflows. A committee of top bureaucrats recently recommended allowing 51 percent FDI in multi-brand retailing; top international retailers including Walmart of the U.S., Tesco from Britain and Carrefour from France, are eagerly awaiting opening up of the retail sector (at present FDI is allowed in single-brand retail outlets).

One reason for the slowdown in FDI was the opposition from several environmental activists to the setting up of megaprojects, especially in the metals and mining sectors, in sensitive regions of eastern India, where locals were also opposed to the projects. However, after much political debate and even court battles, some of the proposed ventures are now getting clearances.

These include a $12-billion project by South Korean steel giant Posco to set up a plant in the eastern state of Orissa. The federal environment ministry approved the project recently, and work is expected to begin soon, along with the inflow of funds.

India’s funding needs are indeed huge. The government estimates that the infrastructure sector — including airports, ports, highways and expressways, and power plants —needs about $1 trillion in investments over the next five years. While government and Indian private sector investments would be able to partly fund these ambitious projects, there are huge opportunities for global investors in the coming years.

Says Arun Maira, member of the government’s Planning Commission: “India will continue to be an attractive investment destination in the long run because we know that revenue streams will come from big markets like India and China, as they are yet to realize their full potential, unlike saturated markets of the U.S. and EU.” He says, however, that there could be some fluctuations in the near term as investors would need money to repay debts in the U.S.

FDI inflows into India usually end up in about a dozen investor-friendly states. These include a few southern states (Tamil Nadu, Karnataka and Andhra Pradesh), two western ones (Maharashtra and Gujarat) and a couple of northern ones (Delhi and Haryana). Mineral resources-rich states of eastern India are also attracting global investor attention of late, though the process of getting the proposals cleared (from both environmental and legal aspects) can be a drawn-out one.

Significant opportunities are also available in either investing or partnering with existing players, in sectors such as special economic zones, IT parks, bio-technology complexes and even semiconductor complexes. The high-tech sector, despite the slowdown in the developed world, continues to grow at a healthy clip and demand for space in these facilities continues to remain high.

In Pune, for instance, according to Jones Lang LaSalle’s Asia Pacific Property Digest blog on August 2, both absorption and leasing activity remained robust in the first half of the 2011 calendar year. Net overall absorption was 2.3 million sq. ft. (213,591 sq. m.), with nearly two-thirds of that total leased during the second quarter. “Over the past one year, we have seen occupiers’ focus shift towards SEZ units,” the report said, “which was clearly visible as IT SEZs accounted for approximately 66 percent, i.e. 1.51 million sq. ft. (140,890 sq. m.), of the total space absorbed in 1H11.”

Story in Pictures

The SP Infocity at Pune, which has emerged as another leading IT hub in India.
Click for a larger view.
Click for a larger view.
Click for a larger view.
Click for a larger view.

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